Summary

In response to a congressional request, GAO evaluated the Department of Defense's (DOD) Defense Financial and Investment Review (DFAIR) to determine its adequacy, the validity of its findings, and the appropriateness of its recommendations.

GAO found that: (1) DFAIR determined that contract pricing, financing, and profit policies were related and should be examined on an integrated basis; (2) the profitability of defense businesses was comparable to commercial businesses from 1970 to 1980 and from 1983 to the present; (3) although DOD reported that a 1980 change in its profit policy resulted in an unintended 0.5- to 1-percent increase in profit objectives, GAO believes that the increase was larger than 1 percent; (4) DFAIR recommended changes to the weighted guidelines to do away with the unintended increase, but profits would have actually increased 25 percent if DOD had implemented all of the recommendations; (5) achieving comparability between defense and commercial businesses will require more than a 1-percent reduction in profit objectives because actual defense business profits have been substantially greater than those DFAIR calculated; and (6) the recently established DOD interim profit policy, based on DFAIR data and analysis, will not achieve the appropriate profit reductions because it uses as a baseline the flawed data analyses contained in DFAIR.